The Auto Loan Process: The Guide to Buying a New or Used Car

Auto Loan


19 min. read

By: FCU Team

Buying a new or used car is an exciting experience that can help you get around comfortably, offer peace of mind with reliability, score you updated features and technology, and instill a sense of pride and accomplishment. However, financing your new or used vehicle purchase can also be a complicated process loaded with tough decisions and financial implications to consider. Many factors around auto loans impact the true cost of car ownership and what is affordable based on your budget and lifestyle. This comprehensive guide aims to walk you through the entire auto loan process step-by-step, starting with getting pre-approved before visiting dealer showrooms or buying online, all the way through comparison shopping for the best rates from financial institutions.

We’ll also explore critical considerations around new versus used car buying, down payments, monthly payment terms, loan lengths, credit score factors, interest rates, total finance charges, fees and add-ons, early repayment options, and everything in between. At Florida Credit Union, our goal is to provide key insights and tips, so you feel empowered to make the most informed decisions possible when financing your next car. Let's get started on the journey to understanding auto loans!

Pros and Cons of New vs. Used Cars

First things first, you’ll need to determine if you should buy new or used when it comes to your vehicle. Here are some key factors to weigh:

New Car Pros

●    Under warranty, so fewer maintenance concerns
●    Can customize features and colors
●    No history of previous owners
●    May qualify for rebates and incentives

New Car Cons

●    Faster depreciation as soon as driven off the lot
●    Higher sales tax
●    Potential fees like destination charges

Used Car Pros

●    Lower purchase price than a new car
●    Certified pre-owned may still have warranty coverage
●    Lower sales tax and registration fees
●    Has already depreciated, so the value may hold better

Used Car Cons

●    No customization of features
●    It could have hidden mechanical issues
●    Higher finance rates and fewer incentive offers

How to Get Pre-Approved for an Auto Loan Before Buying a Car

Getting pre-approved for an auto loan from your bank or credit union before visiting dealerships gives you leverage to negotiate the best deal.

First, you’ll want to check your credit score and report. This will help you understand your credit standing before applying. Free services like Credit Karma can provide your scores and reports quickly. If you’re a Florida Credit Union member, you can also access your credit score for free using our app, with monthly updates to keep you informed. Next, research current auto loan rates at banks, credit unions, and online lenders. Compare to find the best rate based on your credit score, then choose a lender and apply for pre-approval. The process to apply is easy and in most cases all you need is your driver’s license.  With this, you can get a pre-approved amount from the lender that puts you in a strong negotiating position at the dealership.

How Your Credit Score Affects Your Auto Loan Terms

Your credit score plays a big role in determining your interest rate and eligibility for financing. Higher credit scores usually qualify you for the best rates from lenders — Keep in mind, many lenders, like FCU, look at other factors besides credit score and may approve borrowers based on those factors. 
Checking your credit score before shopping allows you to understand your rate range, and you can determine if you need to give yourself time to improve your score if needed.

How Auto Loan Terms Work - Explaining APR, Loan Length, Monthly Payments, Etc.

Understanding how auto loan terms work is key to choosing the best financing. A few terms to brush up on include:

Loan Length

When taking out an auto loan, one of the key decisions you’ll make is selecting the length of the loan term. This impacts both your monthly payment amount and the total interest paid over the life of the loan.

●    Auto loans typically range from 36 months (3 years) to 72 months (6 years). 84-month (7-year) loans have become increasingly popular, too.
●    Shorter-term loans of 36 months have higher monthly payments, but you pay less interest over the life of the loan.
●    Longer terms of 48-84 months or more have lower payments, but you pay more total interest charges over time.
●    Longer term loans increase the risk of owing more than the car is worth if you want to sell or trade it in later.
●    Aim to choose the shortest term that fits comfortably within your budget. Balance the payment with the total interest paid.
●    At some point, if your finances allow, you can always pay extra each month to pay off a longer-term loan faster without penalties.
●    Using the same principal and rate, loan calculators can forecast total interest costs for different loan lengths. Use these tools to understand trade-offs.
●    Avoid ultra-long 84-month loans unless absolutely necessary. This indicates overextending your finances for too much car.

The ideal auto loan term balances the affordability of monthly payments with minimizing finance charges over the life of the loan.

Down Payment

The amount you put as a down payment is an important decision when taking out an auto loan. The down payment affects your monthly payments as well as potential interest savings.

●    A larger down payment reduces the amount you have to finance, which lowers your monthly payment.
●    A down payment of 20% or more is ideal, but most people put no down payment on a car loan.
●    If you have an existing vehicle, it may be to your advantage to trade it in as you purchase your new vehicle, as the value of the trade-in can serve as a down payment, or to lower the loan amount for the new purchase. 
●    With little or no money down, you will have higher monthly payments because you borrow more.
●    A larger down payment provides equity upfront, reducing the risk of owing more than the car's value later.
●    Use an auto loan calculator to estimate payments for different down payment amounts. Make sure it fits your budget.
●    Consider investing extra funds rather than tying it up in a depreciating asset like a car.
●    You can always pay extra principal during the loan to reduce interest costs if you have cash later.

Carefully weigh the trade-off between lowering your monthly car payment and preserving savings/investment flexibility with your down payment amount. 

Interest Rate and APR

The lender will usually quote an interest rate, and will also disclose the APR. The APR, or annual percentage rate, is important when taking out an auto loan. It represents the true cost of borrowing by including both interest rate and fees, such as application fee.

●    The APR reflects the yearly cost of the loan expressed as a percentage rate. It factors in the base interest rate plus any other charges or fees.
●    As of publishing this document, new car loans usually have APRs ranging from over 6% to 14% based on your creditworthiness. Used cars have higher rates, from 7% to 17% typically.
●    The higher your credit score, the lower the APR lenders will offer, everything else being equal.
●    APRs are usually fixed for auto loans but can sometimes be variable depending on the lender.
●    Estimate payments and compare total interest costs between lenders using the APR rather than only the interest rate.
●    An APR significantly higher than current averages indicates you may have poor credit or use a subprime lender.
●    Take time to improve your credit score before applying if your score will put you in a high APR range.

The APR helps you understand the cost of borrowing and accurately compare auto loan offers.

Monthly Payments

The monthly payment amount is a top consideration when taking out an auto loan. It determines affordability and your budget.

●    Monthly payments on an auto loan represent principal repayment plus interest charges.
●    Down payment, loan amount, APR, and loan term all impact the monthly payment amount.
●    Lower down payments and longer loan terms equal higher monthly payments.
●    Use an auto loan calculator to estimate monthly payments based on your scenario.
●    Make sure the payment comfortably fits within your budget and other expenses and financial goals.
●    If the payment is too high, adjust terms like putting more money down or lengthening the loan term.
●    You can pay extra monthly principal to repay the loan faster without penalty.
●    Avoid stretching your budget too thin with a minimally affordable payment. Leave room for unexpected expenses.

Evaluating the monthly payment on a potential auto loan is crucial to making a financing decision you can confidently manage.

Early Payoff

Many auto loans allow you to pay off the balance early without incurring prepayment penalties. This can save you money on interest.

●    Paying extra principal payments during the loan reduces your overall interest costs, which saves money.
●    Auto loans are typically simple interest loans, which are charged only on the outstanding principal balance.
●    When you pay extra beyond the monthly payment, it brings down your principal faster. Less principal = less interest.
●    Review your loan agreement to confirm there are no prepayment penalties, which are rare for car loans.
●    You can make one-time lump sum payments or consistently pay extra monthly to repay the loan faster.
●    Online calculators can forecast your savings by entering different extra payment amounts.
●    Just be careful about extending loan terms when you lower monthly payments, as you negate interest savings.

Paying the principal ahead of schedule without fees is a great way to minimize auto loan costs.

Why Putting Money Down May Not Be Your Best Option

While it lowers monthly costs, putting down more cash upfront on your car purchase isn't always the smart play:

●    Investing extra money rather than putting it toward a depreciating asset can give you more long-term value.
●    Leaving savings readily available in the bank gives you liquidity vs. tying it up in a vehicle.
●    Your monthly budget may support low or no down payment options without being overstretched.
●    You can always pay the extra principal of your auto loan early or refinance later once you save up more. 

Look at the big picture for your money. There are cases where minimizing your down payment makes sense.

What Fees to Expect When Buying a New Car

Beyond the sales price, new cars come with many dealer related fees that can add up quickly. Be prepared for these costs:

Destination Charge

The destination charge is an added fee on top of the vehicle's MSRP (manufacturer's suggested retail price) that covers the cost of transporting a new vehicle from the factory to the dealership. This fee is non-negotiable and is set by the manufacturer.

Key things to know about the destination charge:
●    It averages between $500-$1,500 depending on the vehicle make and model. Luxury and specialty vehicles tend to have higher destination fees.
●    The fee pays for important steps in getting the vehicle ready and shipped to the dealer. This includes inspection, cleaning, mechanical checks, loading, transport by truck or rail, and unloading.
●    It also covers the manufacturer's logistical costs, like coordinating with carriers, scheduling, and route planning to optimize deliveries.
●    The destination charge stays the same regardless of how close or far the dealership is from the factory. It is not based on actual transportation mileage.
●    This fee gets listed as a separate line item on the purchase order rather than bundled into the vehicle MSRP.
●    It is non-negotiable since the manufacturer sets the amount. Dealers cannot alter or remove this pre-set fee.

In summary, while frustrating, the several hundred dollar destination charge is a normal and unavoidable part of purchasing a new car from the factory.

Documentation Fee

The documentation fee, also called the doc fee, covers the costs incurred by the dealership to process all the paperwork and documentation required to purchase and register your new or used car.

Key aspects:
●    Documentation fees range from around $75 on the low end to $500 or more on the high end. The average is $200-$400.
●    The fee pays for the staff and administrative costs of finalizing all the purchasing documents and processing the registration and titling paperwork.
●    Specific activities covered include verification of your identity, driver's license, insurance info, processing the sales contract, DMV registration, applying for the car title and license plates, and more.
●    The documentation fee is negotiable since it is set by the dealership, unlike destination charges set by automakers. You may be able to get it lowered or removed during negotiations.
●    Many states cap the maximum amount that dealerships can charge, such as capping doc fees at $150 or less.
●    Due to their leaner cost structures, online dealers tend to have lower documentation fees.

The doc fee is a way for dealerships to offset the time and costs of handling all the legal and DMV paperwork to complete your car purchase. Know your state laws and negotiate where possible.

Title and Registration Fees

While mandatory, properly registering and titling your new or used vehicle ensures it can be legally driven on public roads. These fees protect your ownership right as the titleholder, too, and include:

●    Title fees - This covers the costs of transferring the vehicle title from the previous owner to you and issuing a new title certificate in your name. Title fees vary by state but the average is between $20 and $115. In Florida, you’ll be looking at around $75-$90.
●    Registration fees - This pays for officially registering the vehicle with the DMV and issuing your license plates. Registration fees depend on your state but typically range from $20-$400. Some states base this on the vehicle value. In Florida, fees are based on vehicle weight and range from $15-35, with an initial fee of $225.
●    Other potential fees - You may also owe a small fee for a new license plate, vehicle inspections in some states, temporary tags, a replacement title if needed, and any applicable taxes.
Your dealer files paperwork like the title application, bill of sale, previous title, and any required inspections or tax documents to register the car. But know, it can take several weeks to receive the official new title and plates in the mail (dealers handle providing temporary registration).

Bonus tip: Paying registration fees on your trade-in right before buying the new car can potentially save you a partial year's fees. Also, some states waive certain fees for electronic title filing.

Sales Tax

Sales tax is charged as a percentage of the final negotiated purchase price of the car. It varies by state and local jurisdiction.

●    In Florida, sales tax is 6%. State sales tax rates range from 2.9% on the low end in states like Arizona, up to 7-8% on the high end in places like California, Indiana, Tennessee, etc. Some states have no sales tax. 
●    County and city sales taxes can be added to the state tax. Combined rates can be as high as 10%+ in some metro areas once these are factored in. County-specific rates in Florida range from 0.5%-1.5%, so your total sales tax could be up to 7.5%. For example, Alachua County’s sales tax total is 7.5% while Marion County’s is 7%.
●    Sales tax is usually lower when buying from a private party rather than a dealer since no dealership commission is involved.
●    Some states have lower sales tax rates, specifically for cars and auto transactions, than the general sales tax rate.
●    Ensure dealers don't base sales tax on inflated fees or optional add-ons to increase the tax amount.
●    Electric vehicles and hybrids may have additional tax credits and exemptions available in some states to incentivize green auto purchases.
●    Most states require you to pay estimated sales tax upfront when registering a used car purchased from a private seller.

Dealer Preparation

Dealer preparation fees cover the costs for the dealer to get a new car ready for delivery after arrival from the factory.

●    Fees typically range from $400-$600 but can exceed $1,000 for high-end luxury or performance cars.
●    Standard prep work includes a vehicle inspection, mechanical checks under the hood, exterior hand washing and polishing, interior cleaning, and vacuuming.
●    Additional services may include paint protection film, interior treatments to protect fabric and leather, window tints, protective bra installation, wheel locks, and electronic rust-proofing.
●    Items covered under the factory warranty, like mechanical reconditioning, are not supposed to be included in this fee.
●    The dealer prep fee is negotiable since it's not set by the manufacturer. You may be able to get it removed or lowered as part of the overall sale.
●    Be wary of high fees that seem disproportionate to the typical services provided. Ask for a detailed breakdown if you are uncertain.

While dealers need to cover costs for prep work, be sure this mandatory fee is reasonable and adds real value for you. You don't want to overpay for items you don't necessarily want or need.

Advertising Charges

These controversial fees have the dealer recoup advertising costs by charging you an extra several hundred dollars. They can sometimes be negotiated out. Note that dealers cannot charge this fee in Florida.

●    Only around half of U.S. states have laws prohibiting or limiting these types of fees to protect consumers. States like California, Florida, and Massachusetts restrict the practice.
●    An advertising charge allows the dealer to recoup expenses spent on advertising by essentially charging the customer. This controversial fee is being banned in more states.
●    It can add several hundred dollars, typically $300-$600, to the total vehicle price. Dealers argue it covers the high costs of advertising and promotional efforts.
●    These charges may be labeled as "market adjustment fees," "marketing fees," or other vague terms. They should be clearly disclosed if charged.
●    Consumer advocates argue buyers should not have to pay directly for dealership advertising, which artificially inflates pricing. Some lawsuits have been filed over deceptive uses of these fees.
●    When negotiating, consumers should refuse to pay advertising charges that add no real customer value. This money is better put toward the car itself.
●    If prohibited by your state and still charged, report the dealer to local consumer protection authorities.

Generally, be wary of advertising charges added to the vehicle purchase price. Scrutinize the details of fees on the sales documents.

Hidden Costs of Buying a Used Car

Buying used can save substantially over new as pre-owned vehicles tend to come with a lower price tag. But watch out for added expenses.

Even though the purchase price may be lower, you will still need to pay sales tax, registration fees, and documentation charges on a used vehicle. Interest rates on auto loans also tend to be higher for used cars, around 2-4% from banks versus new. If you have poor or no credit, expect to put more cash down. Another consideration is that used vehicles may have hidden mechanical issues that end up requiring expensive repairs down the road as the car ages. You also may need to pay to fix up the interior or exterior if they are worn. Lastly, insurance rates are often higher for used versus new cars. Doing thorough test drives and inspections can help avoid buying a lemon. Consider certified pre-owned to get some peace of mind with a used purchase.

What is Dealer Financing? Pros and Cons of Getting a Car Loan Through the Dealer 

Many people finance their cars directly through the dealership. Here are the potential advantages and disadvantages:


●    One-stop shop for purchasing and financing
●    May offer promotional rates to move inventory
●    They already have your information from the sale 


●    Being pre-approved for a car loan allows you to be focused on the purchase and negotiating with the dealer
●    Loan terms may not be the most favorable
●    The loan officer has an incentive to upsell products 

Dealer financing can be convenient but lacks the competitive rates of shopping lenders on your own.

How to Negotiate the Best Deal at the Dealership

When negotiating for the best possible deal at the dealership, preparation and patience are key. Going in prepared with multiple price quotes, whether from other dealers or online estimates, gives you important baseline pricing leverage. Don't be afraid to walk out if the dealer won't come down to your target purchase price - be ready to credibly show you are seriously considering other options too. Keep the initial negotiation focused solely on the vehicle price before entertaining discussions around financing or extra products. Carefully weigh the value of add-ons like extended warranties for your intended ownership period. Use any pre-approved financing you secured as a bargaining chip against rates offered by the dealer. Most importantly, take your time to thoroughly understand and review all paperwork before signing, asking clarifying questions and not succumbing to pressure tactics. Setting a firm budget limit before falling for a specific car prevents overpaying for an emotional impulse purchase. With the right mindset and preparation, you can negotiate the very best deal within your budget.

When is Leasing a Car Better Than Buying?

Should you lease or buy your next car? There are some times when leasing makes financial sense:

●    You want a car with up-to-date technology and/or always want something new
●    You drive less than 15,000 miles per year
●    You want lower monthly payments and don't mind restrictions
●    You don't want maintenance responsibilities and costs
●    You want a luxury vehicle but can't afford to buy
●    You need it for a short time, like a few years for a job

Downsides of leasing include mileage limits, wear and tear fees, and lack of equity. Leasing makes the most sense for short-term use of more expensive vehicles.

How to Refinance Your Auto Loan for a Lower Rate 

Refinancing your existing car loan is a common strategy that can potentially save you money by securing a lower interest rate and reducing your monthly payments. However, refinancing is a process that requires careful analysis of your loan situation and financing options. While refinancing can provide substantial interest savings when done right, it also involves fees and isn't the optimal choice for every consumer. Refinancing your auto loan with another lender can potentially lower your interest rate and monthly payment. Some lenders, like FCU, will even offer a cash bonus for refinancing your auto loan. Here are some tips:

●    It is easiest to refinance within the first 1-3 years of your current auto loan term while you still have a significant balance to pay off. The longer you wait, the less potential interest savings exist.
●    Before applying to refinance, check that your credit score has improved significantly, by at least 50-100 points, since you originally took out the existing loan. A higher credit score means you can qualify for better refinance rates and maximize savings.
●    Thoroughly research current auto refinance rate offers from multiple banks, credit unions, online lenders, and others. Compare their interest rates and APRs against your current loan's rate to identify the size of potential savings.
●    When you close on an auto loan or refinance, your new lender will pay off the outstanding balance left on your old loan and issue you a new loan for that remaining principal balance. This means no cash out - you are just replacing your existing loan with a new one.
●    To justify the hassle of refinancing, aim for your new monthly payment to be at least $100 lower than your current payment amount. Refinancing for small savings under $100 may not be worth it after factoring in origination fees unless you refinance to have your loan at your primary financial institution.
●    Watch out for and factor in any origination fees, application fees, or charges assessed by the new lender for processing the refinance. These upfront costs will eat into your overall interest savings over time.
●    Having substantial equity left in your car and a compelling reason to refinance, like being able to dramatically reduce your interest rate, both improve the chances a lender will approve your application.

What to Do When Your Car Loan Application is Denied

Being declined for an auto loan can be disappointing, but don't panic - you still have options. First, ask the lender to explain specifically why you were denied financing. Common reasons for credit denial include insufficient income, high debt levels, or poor credit history. Adding a creditworthy co-signer to reapply may improve your chances of approval, but ensure they understand the implications of co-signing. Checking with "buy here, pay here" dealerships can get you financing, but expect much higher interest rates. If possible, save a larger down payment of 20% or more and reapply, as this reduces the lender's risk. Taking time to improve your credit score before reapplying can also help your odds. Explore getting pre-approved by online lenders, credit unions, community banks, and other sources as loan requirements and rates can vary. With persistence and a plan to improve your financial profile, you can eventually get approved for an auto loan despite initial denial. Don't let it discourage you.

How to Improve Your Credit Score to Get a Better Auto Loan Rate 

Taking steps to boost your credit score in the months leading up to auto loan shopping can pay off by qualifying you for lower interest rates and savings. Quick ways to give your score an uplift include ensuring all bills and debts are paid on time to build a strong payment history. Paying down balances on credit cards and other debts can also help. Limit applying for new credit in the period before you apply for the auto loan, as too many hard inquiries can ding your score temporarily. It's a good idea to check your credit reports and dispute any errors that may be negatively impacting your rating. Becoming an authorized user on someone else's credit account with good standing can allow you to benefit from their strong history. Once you've maximized your score through responsible credit management, shop around with multiple lenders to find the very best rates your improved profile now qualifies for. Investing in your credit score ahead of time can really pay off when it comes to auto loan savings.

What to Know About Auto Loan Prepayment Penalties 

Prepaying extra on your auto loan ahead of schedule typically does not incur penalties, making it a great way to save money. Most auto loans are simple interest loans, meaning interest is charged only on the outstanding principal balance. When you make additional payments toward the principal, it reduces the balance owed and therefore reduces the total interest you pay over the full loan term. Before prepaying, review your loan documents to confirm there are no prepayment fees, which are rare for auto loans. You can prepay by making lump sum payments or increasing your regular monthly payment. Just be careful when lowering monthly payments that you do not extend the overall loan term, as you would end up paying more interest costs over time. Prepaying your auto loan can provide big interest savings, allowing you to pay off your car faster and save money.

How Co-signing an Auto Loan Affects You

Co-signing allows someone with better credit to help another person qualify for a loan. But it comes with some drawbacks:

●    The co-signer is equally responsible for repaying the full loan amount. Default or late payments affect your credit, too.
●    You may not be able to get your own separate financing since this debt impacts your debt-to-income ratio.
●    If the primary borrower defaults, the lender can come after you for repayment through collection calls, lawsuits, or wage garnishment.
●    Co-signing may strain relationships if the other borrower struggles to make payments.

Only co-sign an auto loan for someone you completely trust. If you are a co-signer, ensure you can access statements to monitor payment activity.

Strategies to Get the Best Used Car Loan Rates 

Navigating used car financing does not have to be daunting if you employ some savvy tactics to secure the lowest interest rate. Start by getting pre-approved directly through a credit union or community bank, as their rates tend to beat what bigger banks or dealers offer. You can also look into certified pre-owned vehicles that come with warranties and promotional financing from the manufacturer and see if the dealership can match or improve on your outside pre-approval rate when they offer financing. 

In the months leading up to your auto loan application, you’ll want to focus on improving your credit score to qualify for better rates. Consider putting more money down and shortening the loan term, as both can lower your interest rate. Do your homework and set yourself up for success, and you can secure affordable used car financing, even in a higher rate environment.

Auto Loan Options for First-Time Car Buyers

Even with a limited credit history, first-time car buyers can still qualify for financing. Options include:

●    Applying with a qualified co-signer who has strong credit.
●    Seeking “first-time buyer” loan programs from lenders like credit unions. These consider other factors beyond credit.
●    Financing an older used car with a smaller loan amount presents less risk.
●    Exploring leasing options that have lower approval requirements than purchasing.
●    Looking at loan options from small or online lenders who may use alternative underwriting approaches.
●    Favoring 48-60 month loans over very long 72-84 month terms to appear more financially stable. 
●    Take out a credit builder loan or secured card ahead of time to start establishing credit.

Protecting Your Investment with FCU

After you buy a car, it's important to protect your investment. FCU offers three types of coverage to help safeguard you financially in case of unexpected events: Guaranteed Asset Protection (GAP) to protect your investment if your vehicle is stolen or damaged beyond repair; Mechanical Breakdown Insurance & Roadside Assistance to help pay for accident-related costs; and Loan Payment Protection so that if an FCU borrower is disabled or passes away, loan payments can continue to help loved ones. With this suite of options, FCU has you covered to protect your vehicle investment against financial hardship due to unforeseen circumstances.

The End of Your Auto Buying Journey

The auto loan process is a multifaceted journey that involves various considerations, from choosing between new and used cars, to understanding the impact of down payments, fees, credit scores, and loan terms. We hope this guide provides invaluable insights for consumers looking to navigate the complexities of auto financing successfully.
Florida Credit Union wants to equip you with essential insights into the various factors influencing your car financing decisions, ranging from the choice between new and used vehicles, the impact of down payments and fees, the significance of credit scores, negotiation strategies, and even refinancing options. By offering a wealth of practical knowledge, our aim is to empower you to make well-informed choices tailored to your unique circumstances.